Get Ready for a Lehman's-Style Credit Crunch

Everyone has heard of the end of the world supposedly predicted by the Mayan calendar at the end of 2012.

Well, the end of our financial and economic well-being may be coming this year--by the end of 2012.  Events are playing out in such a way to climax this fall and into the end of the year.

The upcoming calamity is a complete collapse of the world of credit and banking that will usher-in something akin to the Great Depression--but perhaps worse.   Raoul Pal outlined a sequence of events in my blog that may very well result in the biggest financial crisis that the world has ever seen--the "Great Reset".   Events are now moving faster than feckless politicians can react--especially in Europe.   Europe is basically "ground zero" of the impending Armageddon.

Sounds crazy?  Perhaps.

But now, in a statement from a Bank of England policymaker and spokesman, comes a warning that the cross border liquidity crunch building in Europe is already reducing liquidity and that everyone should get ready for a Lehman's style credit collapse.   To refresh your memory, such a collapse ends with a halt of credit for trade and a seizing-up of finance across the world; where world-wide commerce grinds to a halt as in the 2008 Lehman aftermath.   The ultimate version of the credit crunch this time is that there will be no trade finance, no finance for farmers, no shipping finance,  no leasing, no bond market, no nothing.

Now from The Telegraph and Bank of England policymaker Robert Jenkins

Cheap and ready access to the liquid assets that oil the financial markets are under threat from both state-imposed capital controls and flagging confidence in the euro, Robert Jenkins, a member of the Bank’s Financial Policy Committee, told the Global Alternative Investment Management conference in Monaco.

Without easy access to liquidity, markets could seize in a re-run of the credit crunch after the collapse of Lehman Brothers, he warned.

“Those of you who traded asset backed securities in 2008 can testify to the speed with which liquidity can disappear,” he said. “Yet despite these examples, many continue to assume that ... ‘liquidity’ is free and will be freely available.

“Short-selling bans in Europe and bond purchase penalties in Brazil are a foretaste of the future. I recommend that you send your best and your brightest to the library to research state intervention in the post war period. It could come in handy. For like clean air and water, market liquidity is no longer limitless and no longer free.”

His comments came just minutes before the Bank launched its first £5bn emergency liquidity auction under the arrangements unveiled last week to protect Britain’s lenders from a crunch. At least £60bn will be made available to Britain’s banks over the next 12 months. 

Mr Jenkins’ comments in Monaco illustrated the urgency of the scheme. Markets are facing another crisis due to the resurgence of “cross-border” risks in the eurozone, he warned, and a calamity will not be averted unless confidence is comprehensively restored in the single currency project.

“The spectre of cross border risk is back. Its impact is difficult to quantify but must not be underestimated,” he said. “Capital is leaving the very countries that need it – and flowing to the countries that don’t. At the same time financiers are cutting back on credit while they determine and manage their cross-border risk.

“It is not enough to contain an accident. The challenge is no less than to restore faith in the entire euro construct. Confidence must be such as to completely banish cross-border risk from financial planning.

"Until and unless this is accomplished the euro zone credit system has the potential unravel, the free flow of capital will be impaired and the economic recovery constrained."

My recommendation is that you have enough cash around to survive several months of "banking holidays" where ATM machines don't work and there will be limited access to cash.   I know it sounds crazy, and it's still not the most likely scenario, but don't say that you weren't warned.  Dollars and gold will be the great safe havens in the most extreme crunch envisioned.

Pictures of Koh Samui and Koh Tao Thailand

In a break from 'hard news,' please enjoy the following recent vacation pictures in Thailand.  There is a blog coming in the near future about Thailand and my impressions after 15 years of visiting here.

Exercising in Lumpini Park (sorry, no picture yet of me actually exercising!)

Koh Samui and Koh Tao

I hope you enjoyed them.  Click any/all for larger image.

The Scariest Outcome Ever Imagined

From Zero Hedge and Raoul Pal

• We don’t know exactly what is to come, but we can all join the very few dots from where we are now, to the collapse of the first major bank…
• With very limited room for government bailouts, we can very easily join the next dots from the first bank closure to the collapse of the whole European banking system, and then to the bankruptcy of the governments themselves.
• There are almost no brakes in the system to stop this, and almost no one realizes the seriousness of the situation.
• The problem is not Government debt per se. The real problem is that the $70 trillion in G10 debt is the collateral for $700 trillion in derivatives…
• Yes, that equates to 1200% of Global GDP and it rests on very, very weak foundations
• From an EU crisis, we only have to join one dot for a UK crisis of equal magnitude.
• And then do you think Japan and China would not be next?
• And then do you think the US would survive unscathed?
• That is the end of the fractional reserve banking system and of fiat money.
• It is the big RESET.

It continues:

• Bonds will be stuck at 1% in the US, Germany, UK and Japan (for this phase).
• The whole bond market will be dead.
• Short selling on bonds - banned
• Short selling stocks – banned
• CDS – banned
• Short futures – banned
• Put options – banned
• All that is left is the Dollar and Gold

• We have around 6 months left of trading in Western markets to protect ourselves or make enough money to offset future losses.
• Spend your time looking at the risks of custody, safekeeping, counterparty etc. Assume that no one and nothing is safe.
• After that…we put on our tin helmets and hide until the new system emerges
• From a timing perspective, I think 2012 and 2013 will usher in the end.
• You have to understand that a global banking collapse and massive defaults would bring about the biggest economic shock the world has ever seen.
• There would be no trade finance, no finance for farmers, no shipping finance,  no leasing, no bond market, no nothing.
• The markets are at the frankly terrifying point of realising that LTRO, EFSF, QE etc are not going to prevent this collapse..
• The next phase as Spain and Italy go, will be the nationalisation of banks and the assumption of the bank debts on Government balance sheets.

• Then expect to be shut out of financial markets……